Shareholder Protection Insurance

If a shareholder in your private limited company, member of your Limited Liability Partnership (LLP) or partner in your partnership were to die, could you afford to purchase their share of the business? 

If not, there could be significant implications for the future of your business. Shareholder protection can help you protect the ownership of your business in this situation.

What is share protection?

A share protection arrangement enables the surviving owners to purchase the deceased owner's share of the business from the deceased owner's estate and ensures that the deceased owner's dependants have a willing buyer and cash instead of a share of the business.

How does share protection work?

In the event of a business owner dying or being diagnosed with a terminal illness (life expectancy less than 12 months) or a specified critical illness*, share protection can provide a lump sum to the remaining business owners.

This means that if a valid claim is made during the length of the policy, the lump sum could be used to help purchase the deceased partner, shareholding director, or member’s interest in the business. 

*If Critical Illness Cover is chosen at outset for an extra cost.

Why consider share protection?

If a business owner dies with no share protection in place, their share in the business may be passed onto their family. This means that the surviving business owners could lose control of a proportion of the business, or in some circumstances, all of it. The family may choose to become involved in the ongoing running of the business or could even sell their share to a competitor.

The benefits of Shareholder Protection Insurance

Losing a valuable shareholder, whether through illness or death, can have a destabilising effect on a company. Here are some advantages of taking out Share Protection to safeguard your business.

  • You can stay in control of the business by preventing the shareholding from being inherited by an unwanted beneficiary, whose priorities may not align with yours.
  • You can reduce disruption at a challenging time for your business by making an eventual transfer of shares as orderly as possible.
  • You have the flexibility of coming to different agreements on how to manage the shares; for example, owners could buy shares back from a shareholder who’s diagnosed with a critical or terminal illness.
  • You can avoid costly buy-out capital and you won’t have to dip into your savings.
  • You can ensure there is greater transparency for the insured person’s beneficiaries as they’ll have a clearer picture of what they will receive for selling the shares to other shareholders.

Tax Situation

Because each policy is qualifying or has no surrender value, there will be no income tax liability on the proceeds.  Neither will there be CGT, because the proceeds are payable to the original beneficial owners the other business partners.

If all the business owners take part in the share protection there will be no Inheritance Tax (IHT) at the outset or when further premiums are paid. This is because it can be claimed that the arrangement is a bona fide business transaction for full consideration with no gratuitous intent (Inheritance Act 1984) (IHT 1984 S 10) full consideration being the fact that all the business owners taking part. There will be no surrender IHT on the policy on death, since no transfer of value has happened. There will be no IHT on the share protection on death, because 100% business property relief applies.

Tarnia Elsworth, Protection Adviser

Phone 01524 920015 Mobile 07951113654